IKEA International Expansion - Case Study Example

Marketing Case study: IKEA Table of Contents Case Summary 3 Case up 4 Up d SWOT Analysis 5 Strength 6 Weaknesses 6 Opportunities 7 Threats 8Challenges 9 Alternatives 9 Alternative 1 9 Pros 10 Cons 10 Alternative 2 10 Pros 10 Cons 11 Alternative 3 11 Pros 11 Cons 11 Selected Alternative and rationale 11 Works Cited 13 Case Summary IKEA was founded in 1943 and since then, it has been growing rapidly. In the present day retail industry, it is one of the popular brands and largest home furnishing company across the world. The company’s principles have been low cost and frugality since inception. The main concept of the company is to create and deliver functional and well-designed furniture at a low cost so that mass affordability can be achieved. The concept of production of IKEA is very unique and the company sells furnishings in parts, which consumers need to assemble themselves. The DIY (Do-it-yourself) idea has helped the company in creating low cost, yet stylish furniture products. Another important fact about DIY concept is that it attracts consumers for gaining new experiences of self-assembling furniture (Clayton). The company is presently the largest exporter of Sweden and an extremely popular brand in the European market. The main reasons behind the company’s success are excellent performance in production, supply chain management and marketing. Since the company sells mostly flat-parts that consumers need to assemble themselves, it has taken considerable effort to increase attractiveness of its product market through services such as, in-store child care and play areas and eating areas. Moreover, bulky products are delivered at the doorstep of consumers and in case the consumer wishes to carry the product themselves, the company bears the rent charges of carracks. The oldest supplier of the company is Swedish, but currently the company is working with different suppliers worldwide, including those from China, Italy and Germany. The company’s ability to create long-term relationship with suppliers is the main reason of its successful supply chain management system. The main strategy of the company is to deliver high quality product at low cost as well as implementing sustainability in all activities (“Ikea home tour”). Every global company tries to enter the market of United States as a part of its global expansion strategies. IKEA also recognized opportunities in the US market as the cost of living of the country is higher than that of other economies and leveraged its brand reputation accordingly. The company faced certain challenges in the US market as the purchasing habit and pattern of US consumers is to a certain extent different from that of European consumers. In US, low cost and self-assembled products are considered of poor quality and are related to those sold at Wal-Mart and other retail stores. One of the major problems that the company faced in the US retail industry and that dampened its expansion activity is lack of sufficient financial support. The company needed to develop market strategy suitable for the American market (Clayton). Case update Doz and Prahalad suggested four international strategies that a company can adopt for entering a foreign market, namely global, international, multi-domestic and transnational strategy. In 1984, IKEA first attempted to enter the US market while adopting the global strategy. Under this strategy, the company offered similar standardized product ranges as that in Europe. The failure of this strategy resulted in IKEA shifting towards transnational strategy by producing products that were created according to demand of local market of the US (Jonsson 17-44). The company learned a lesson from the US experience and adopted a similar transnational strategy for entering the market of China. The company entered the retail market of China in 1998 and formed joint venture to comply with local law. This greatly helped the company to understand the local market needs and culture and to frame its strategy accordingly. The company made minor changes in its furniture designs as well as modified store layout to meet the local expectations. The strategy proved successful and the outcome was that by end of 2008, the company had at least few profitable stores in China (Landry, Min and Paulina). The company did face some problems in China, which were slightly different from that of that in the US and Europe. The company opened a number of stores in Beijing and Shanghai, which resulted in rapid growth of profit. For instance, from 2003 to 2004, the company’s profit grew by 40 percent, but local stores of the company were not quite profitable. The company recognized the strategic problem prevailing in the Chinese market. It was observed that the company’s product price was higher than that of the average in China. Further, the company realized that local products were cheap due to inexpensive local labor and raw material. The company built a number of factories and increased its local suppliers for raw materials in China. The foundation of local factories reduced the import taxes and other production costs. This helped in reducing overall product cost. In addition, the company had to modify its marketing strategies in China to sell products (Chu, Girdhar and Sood, “Couching tiger tames the dragon”) (Johansson and Thelander 199-219). The company’s fiscal report suggests that the company achieved sale value of 23.1 billion euro in 2010, which is 7.7% higher compared to that in 2009 of 21.4 billion euro. In addition, the company earned revenue of 25.2 billion euro in 2011 and experienced a growth rate of 7%. The majority of sales value of IKEA is covered by Europe comprising 79% of the aggregate value. While America covers around 14% and Asia, Russia and Australia contributes about 7% in the sale figure. Presently, the company is operating in 38 countries and has 325 stores; of which 287 stores in about 26 countries belong to the IKEA group (“Ikea grows market share as global sales rise”). The current strategy of the company involves product diversification, where its major marketing strategy involves catalogue distribution. It was observed that for an international retailer such as, IKEA, it was quite unusual to undertake catalogue marketing and it is the only company who is involved in catalogue marketing at mass level. The company produces 300-400 pages catalogue in 30 different languages. Recently in 2013, the company introduced special symbols that are readable through the company’s app for iPhone and other android devices. Even so, the company could not employ this strategy in Chinese market as local manufacturers had a tendency to replicate the designs. As a result, the company in China uses Chinese social media and micro blogging websites to target consumers (Damien and Carole). Updated SWOT Analysis STRENGTH WEAKNESS Customized environment Strong brand image Sustainable products Self-Assemble Approach Limited Customization Constricted Marketing Strategy Weak Online Services OPPORTUNITY THREAT Sustainable products at economic cost demand for convenient shopping International Competition Changing Consumer Preference Matured Market Strength The major strengths of IKEA include its customized environment for consumers, brand image and strong focus on sustainability. The company stores provide homely environment to consumers. There are child-care and play areas for children so that consumers can browse and purchase conveniently while their children are safely placed. Moreover, there are eating centers for long-hour purchasers and explorers. In its store, IKEA’s employees assist consumers in creating and building their own furniture, making it an innovative experience. The company’s brand image and value is highly placed in the global market, which acts as its one of major strengths. The company has been appreciated by a number of reputed business magazines and sites for its innovation, low cost yet high quality product and implementation of new technologies. The company recently has included a variety of furnishing products, which are necessary for completing a house. Another major advantage that the company enjoys over other retailers is economies of scale. The company purchases its raw materials in bulk; thus, at a lower cost. Additionally, its suppliers deliver directly at IKEA store, which in turn reduces extra handling cost. Environment safety has been one of the important issues for the company while undertaking various business processes and expanding in different countries. The company has always concentrated upon producing products that are not only cost effective, but environmentally sustainable as well. The company has incorporated sustainability feature in product design to product disposal for lowering environmental footprint (Hertz and Hultman 267-268). Weaknesses The company has a number of internal strengths; however, it does have a few weaknesses as well, which need to be acknowledged for improving services. The major weaknesses include its self-assemble approach, limited customization, constricted marketing strategy and weak online services. IKEA has added innovation in its operation by including DIY approach, where some consumers do enjoy assembling and building their product from flat-parts. Yet, several people prefer readymade products. They do not appreciate self-assembling concept as it is time consuming. The company’s target consumers are young and cost conscious individuals who want elegant and fashionable products at an affordable price, but these consumers are also concerned about their convenience. There is a scope that consumer may select to pay a little extra to traditional furniture retailers for readymade products. The company’s cost efficiency is a result of its simple products with basic structure. Nevertheless, taste of consumers from different countries varies to a great extent. For instance, the products of IKEA are highly acceptable in European countries, whereas Americans prefer variety and individually customized products more than standardized ones. The main promotional strategy of IKEA is to inform consumers through catalogue marketing. In a competitive era, where every retailer is involving as many strategies as possible, catalogue marketing is not sufficient to entice consumers in purchasing. The company’s dependence on catalogues and word-of-mouth as promotional strategies may prove inadequate in countries such as, the US and other developing economies. The company needs to develop advertising and promotional strategies as per the taste of consumers and involve sources such as, internet and television, for promotional purpose. In the age of e-commerce, online support of the company has been observed to be quite weak. The consumers can go through product descriptions online, yet all products are not available for online purchase. The company needs to improve its e-commerce support as consumers are increasingly becoming dependent on internet and prefer e-shopping. Opportunities Every business utilizes its strengths to take complete advantage of the emerging opportunities. Keeping in view the current market condition, consumers are quite inclined towards economic products. The other opportunities are demand for convenient shopping and green products. The current market situation has weakened considerably and has caused a decline in purchasing power of consumers after the financial crisis of 2007-08. The most affected countries were developed economies such as, the US and Europe. Hence, consumers are seeking low cost, durable and quality products. IKEA has a great opportunity in materializing these demands. Especially, in the US, the company has a great scope for selling its products as post-recession, increased purchase of affordable commodities has been witnessed among consumers. The company needs to work on its weaknesses and improve its e-commerce services. The consumers are growingly becoming internet friendly and as a result, they hardly visit physical store. They prefer purchasing products online and taking home delivery. While IKEA does provide home delivery, its products also need to be available for online purchasing, so that consumers enjoy convenient shopping. The company needs to reduce its reliance on physical stores and build a stronger e-commerce network. The company enjoys a great advantage by introducing green (sustainable) products in its product line because over time, consumers are demanding more of low priced sustainable products. Consumers view IKEA’s products as futuristic in nature as well as are aware of its green practices. The company should take advantage of this opportunity for growing its business. Threats For successful utilization of its opportunities, a company needs to be aware of its external threats so as to frame sufficient plans to counteract these threats. The major threats that IKEA is facing currently include international competition, changing consumer preference and matured market. The self-assembling or DIY concept is no more an innovation that was implemented by IKEA; a number of furniture retailers across the world are adopting this concept. As a result, competition for the company is increasing at a very fast pace. Moreover, the company also encounters online competition from companies such as, Bludot.com and Furniture.com, who offer online purchase discounts and product comparison facilities. Consumer preferences have altered significantly over years and their taste are constantly changing. This is causing companies to incorporate increasing number of variety in their product mix, so as to live up to their consumers’ expectations. IKEA also need to adopt such strategies so that its products are not considered obsolete. The company should also look for diversification to cater to different type of consumers. IKEA needs to take in consideration the preference of mature markets of different countries before deciding upon marketing strategies. Mature markets can pose threat to new entrants as consumers already have pre-decided notions about the best service provider. Hence, it is one of the important threats that a company often faces (“SWOT analysis and sustainable business planning”). Challenges In the present retail industry, survival of a company is continuously being challenged by increasing technological development and innovative strategies. The furniture retailing, IKEA, is also facing certain challenges, which requires to be mitigated so as to maintain superior position. One of the major challenges IKEA is facing presently is lack of diversified marketing strategies. The firm’s continuous dependence on catalogues and word-of-mouth for consumer awareness is becoming obsolete in the age of internet and social marketing. Another important challenge is standardized product concept of IKEA. The company’s products are highly standardized with little variation in terms of color and design. Contemporary consumers prefer variety and customized products along with low cost and sustainability. So, the company requires incorporating these features in its production. Lastly, the company’s e-commerce system is comparatively weak and being an international retailer, this is a serious threat. IKEA need to work towards managing its online marketing as well as physical stores to achieve competitive advantage. Alternatives Alternative 1 IKEA can currently focus on developing its online store more than physical stores as it has sufficient physical stores and an integrated online store will ensure that products are easily accessible to consumers from all over the world. The online store will be an integrated system connecting all its physical stores to a cloud store. This integrated process will result in greater access to otherwise not-reachable consumers. Pros The main advantage of having online store is that the company will be able to apply techniques of online marketing such as, social marketing, product promotion through blogs and online discounts. The consumer will have direct access link to the store. In the online store, consumer can conveniently view the product varieties as well as cost. The company’s cost on consumer handling at its physical store will be reduced. The company as a part of its online marketing can undertake surveys to gather feedback from consumers about its products. Cons The problem associated with this alternative is that the company has to increase product varieties, both horizontally as well as vertically. It has to spend a significant amount on setting up a website and its maintenance. Alongside, it is difficult to manage consumers’ posts and reviews online. Alternative 2 The second alternative for the company is to develop product diversification so as to cater to the needs of consumers in a holistic manner. By product diversification, the company can maintain its core strategy, but can also sell pre-assembled products in its stores. The best example of product diversification is Dell. IKEA should also include variety in its products, in terms of design and color. In addition to product diversification, the company should improve marketing strategies. A certain changes such as, telemarketing and advertising in television, social networks and newspaper, should be incorporated in its promotional strategy as a part of this alternative. Pros The main advantage that is expected from this strategy is that sale of the company may increase substantially as it is globally well-known and some consumers only face problem with the DIY concept. In addition, telemarketing and advertising will result in greater consumer awareness about the company and its products as consumers generally do not prefer going through 300-400 page catalogue. Cons The company, under this alternative, will require incurring higher amount of advertising and marketing cost than it has invested so far. Furthermore, it will have to undertake surveys to understand consumer needs regarding the pre-assembled product section, which is time consuming as well as costly. Alternative 3 The third alternative for the company can be franchising and licensing to expand its business in countries where it is currently not present. Franchising is to lease firm’s business and brands to another person/firm located in a different location for a specific period in exchange of royalty payment while licensing is to give rights to another party to use company’s intellectually property for business purpose. The licensee also pays royalty to the licensor. These techniques are quite common in foreign brands such as McDonald’s, Microsoft, 7-Eleven and Dunkins’ Donuts. Pros The company will be able to expand its business in different locations without bearing additional cost of setting-up store and hiring employees. Moreover, franchisee and licensee having better knowledge of local taste and culture will be able to sell better. Cons Franchisee is governed by securities law; while licensing is governed by contract law hence the licensor has lesser control on the licensee. There is a high chance of intellectual property right breach in case of licensing. Moreover, in franchising the company need to bear the cost of training and development of employees. Selected Alternative and rationale From the three alternatives that have been discussed in this paper, the second alternative was considered most appropriate for IKEA to improve its competitive positioning. It has been observed that a number of consumers hesitate purchasing from IKEA because they consider unassembled product parts can be of poor quality, in addition to the time consumed for assembling the product parts. Moreover, some believe that if they are paying for a product, then it is no point to waste more time in its set-up. Due to such reasons, many consumers in America avoid purchasing from IKEA and prefer traditional furnishing retailers. By classifying its products in self-assembled as well as pre-assembled product sections, the company will have access to greater share of consumers and will be able to cater to every consumer’s requirements. Through diversification, the products will be available in more customized form; this will resolve the problem of company’s rigidity and inflexibility regarding standardized products. It is possible that the company’s production cost may increase substantially, but horizontal and vertical integration in diversification will entail greater market share and brand value. In addition, the alternative strategy suggests the company to extend its marketing and promotional strategy beyond catalogue and word-of-mouth marketing. Through telemarketing, advertising in newspaper and television and social marketing, the company will be able to appeal to greater number of viewers. These sources are more approachable and appealing to consumers than thick catalogues. It is expected that through product diversification and extension of company’s marketing strategies, IKEA will be benefitted in approaching a high number of potential consumers. Works Cited Badier, Damien and Carole Rousset. "Strategies adopted in the International Market: The case of IKEA in France." Diva-portal (2007): 1-49. Diva-portal. PDF file. Capdevielle, Landry, Min Li, and Paulina Nogal. "A creation of competitive advantage by using differentiation of company´ s strategy actions: The case study of IKEA Sweden with experiences on Chinese and French markets." Diva-portal (2007): 10-65. Diva-portal. PDF file. Chu, Valerie, Alka Girdhar and Rajal Sood. “Couching tiger tames the dragon.” Business Today. Living Media India Limited, 2013. Web. 24 June 2014. Harapiak, Clayton. "IKEAs International Expansion." International Journal of Business Knowledge and Innovation in Practice 1.1 (2013): 21-34. MPRA. PDF file. Hertz, Susanne and Jens Hultman. "On global supply chain development." Northern Lights in logistics and Supply Chain Management 1 (2008): 267-268. Print. “Ikea grows market share as global sales rise.” BBC. BBC, 2013. Web. 24 June 2014. “Ikea home tour.” IKEA. Inter IKEA Systems B.V., 2014. Web. 24 June 2014. Johansson, Ulf and Åsa Thelander. "A standardized approach to the world? IKEA in China." International Journal of Quality and Service Sciences 1.2 (2009): 199-219. Print. Jonsson, Anna. "A transnational perspective on knowledge sharing: lessons learned from IKEAs entry into Russia, China and Japan." The International Review of Retail, Distribution and Consumer Research 18.1 (2008): 17-44. Print. “SWOT analysis and sustainable business planning.” The Times 100. In Times Newspaper Limited, 2009. 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